Southern Comfort - Canadian Style
Canadian Forest Producers Infiltrate the U.S. South
There is a changing profile of the American softwood lumber industry as the Canadian forest producers have infiltrated the U.S. South, and much of it has happened quietly over the last ten years. I say quietly, but the major Canadian players are all publically traded companies on the Toronto Stock Exchange, so each of their many moves and acquisitions come with the typical pageantry and proclamations public owned entities are accustomed to. It just seems the U.S. lumber industry has been too preoccupied to pay attention to the encroachment.
It began discreetly enough in 2000, when West Fraser Timber bought a pair of southern mills from Plum Creek. By 2008, Canfor had joined their Canadian brethren in purchasing southern U.S. pine mill operations and had grown so much that each company landed in the top ten ranked softwood producers in the U.S. South. They aggressively expanded their footprint over the next ten years and now West Fraser is the region’s largestproducer. Two new Canadian firms, Interfor and Conifex, also entered the market with major acquisitions starting in 2014 and they too have entered the list of top ten southern producers. Canadian firms now account forover a third of the region’s lumber production and boastthree of the five largest producers of southern pine in the U.S. South. They have increased their sawmill count to over 50 production facilities with no signs of slowing down.
Maybe one of the most impressive factors about the Canadian invasion of the southern lumber industry is the way they have systematically invested in their assets to rebuild and modernize operations. They have consistently introduced major capital improvement plans to grow their southern yellow pine production and have undoubtedly forced many regional competitors to do the same to keep pace.
Source: Forisk Consulting
*Based on announced capacity increases
So what attracted these Canadian lumber concerns to turn their attention to the U.S. southeast? There are actually numerous reasons they converged on Dixie. They were all initially attracted by the long-term, plantation-based fiber supply – referred to as the timber basket. But, the billions of board feet of sustainable, well managed, plantation-growth southern pine that was just coming into its prime, became particularly attractive five years ago. That’s when the reality of the impact the mountain pine beetle infestation would have on the British Columbia interior lumber producing regions, came into focus. This prolific timber producing region was about to be devastated by an unprecedented blight that destroyed over 39 million acres of pine/spruce forests. The result has been a log supply that continues to collapse after the initial salvage efforts, relative to the established sawmill and plywood operational capacity. Log prices have skyrocketed in the aftermath and the region is forecast to lose dozens of mill operations in the next decade. The region has also battled severe forest fires the past few years which have compounded the problem. So the move by the Canadian mills had as much to do with long-term survival, as anything.
Of course, the migration south for their acquisition spree had multiple benefits to these British Columbia based companies. In addition to the obvious proximity and availability to the South’s 210 million acres of fast- growing timber basket, and its association log-cost logs, there was an opportunity to spread their operations over a wider geographic base and to diversify their product profile with the SYP lumber business. The favorable business climate was also attractive in the South, as was the proximity to a vibrant housing market from Texas through the southeastern seaboard. Another draw was availability to a skilled, experienced sawmilling and lumber labor pool in the region. I believe another possible motivation could be escaping (maybe diversifying would be a better word use) the Canadian government-run supply control they were subject to in their current environment. It presented a best of both worlds scenario.
But, perhaps two of the most intriguing reasons Canadian forest companies were attracted to the South were simply tied to bottom-line economics. Southern mill operating margins are the highest in the world, a by- product linked to the readily available, low-cost timber base. The leadership of these astute and savvy lumber concerns recognized that the 2008/2009 economic recession in the states created a surplus of wood within the South’s fast-growing supply base, and they acted quickly to take advantage of the situation. Secondly, there is the sentiment that acquiring production in the U.S. is a hedge against Trump’s softwood lumber tariffs and duties, which currently totals 20.23% on any Canadian lumber coming across the border. It would be hard to dispute that motivation but it would be equally hard to get Canadian producers to admit to it. In reality, our two countries have had an on-again/off-again dispute around softwood lumber for more than 35-years, now so it does not seem outlandish that decided to it was in their best interests to play ball on both sides of the border.
One question you may be asking is where were the dominant U.S. owned lumber producers during this incursion? That would have included (in order of production capacity) Weyerhaeuser, Georgie-Pacific, Temple Inland, and Gilman Companies. It is a study in contrast when comparing the collective strategies of the U.S. producers to their Canadian counterparts during the time in question. Weyerhaeuser was actually decreasing their lumber production capabilities at the time and reshaping the company as a timberland manager rather lumber producer. G-P, under their new owner, Koch Industries, was refocusing their efforts towards their paper and pulp business. They did purchase Temple-Inland in 2013 which added to their sawmill portfolio, but that was mostly after the Canadians had made their mark. Temple-Inland, for their part, divided their attention between corrugated packaging and to a lesser extent, their building products division during 2005-2010. They were subsequently purchased by International Paper in 2012 who spun off the building products sector to G-P. And finally, the Gilman Companies actually sold out to their Canadian nemesis, West Fraser, which immediately thrust them into the #1 production position in the U.S. South. In a nutshell, I would surmise that the Canadian contingent was solidly more focused in their efforts to be in the sawmilling business in the U.S. than the American lumber producers, who seemed to be more attentive to other enterprises. Put another way –they couldn’t see the forest for the trees.
Despite what many may think of this foreign infiltration into the U.S. South and its southern pine industry, there have been many positives for the small communities that typically host sawmill operations, especially in the way of lucrative job creation. Concerns typically center around “what if” assertions like: what if the Canadian firms, who are so adept at exporting, decide that the export market is more lucrative than the domestic market and transports more fiber out of the country? Where will their loyalties lie during a housing downturn? What if the timber basket diminishes over time and cannot support the high-capacity production that has come on line?
I would suggest these are all viable questions, but I’m not sure the answers would be any different for the American owned lumber conglomerates producing in the region. For now, it is simply a fact of life that Canadian forest producers have infiltrated the U.S. South. In my mind, I’m more comfortable with an experienced, committed lumber concern owning and running the operations than a private equity firm that has no connection or experience with the lumber industry. Call it Southern Comfort...Canadian Style.